Credit Institutions


Analytical commentary

What will be the new growth drivers of the Russian banking system in the coming years?

– According to ACRA the main growth and change drivers in the banking system in the coming years should be provided by the banks’ owners. This is primarily due to the fact that historical growth drivers, that is macroeconomic drivers, chiefly consumption, and momentum drivers, like import restructuring, are no longer effective.

To achieve the quality transformation in the banking industry we should now solve the following paradox. On the one hand, previously the return on assets of fair banking business in Russia was much lower than that in the majority of real economy industries, like mining, trade, transport, etc. Now the gap has significantly reduced mostly due to reduced return on assets in the real economy. However, it should be noted that the banking business remains unattractive for investors.

On the other hand, many current bank owners, including the state, face a dilemma whether it is economically feasible to maintain possession of their asset There are a lot headache factors: the return on assets is low, regulatory and supervisory pressure is growing and increasing operating expenses, the mid-term macroeconomic conditions do not seem promising for excess profit.

But such situation cannot last forever, and bank owners should make a tailored solution on their assets’ future: sell it, merge with other players or enhance their businesses model. Their responsible business behavior will contribute to building-up an effective banking industry structure with highly motivated owners focused on further development of their banks and Russian banking system in general to complain with statutory requirements and demands of the Russian economy.

ACRA believes that in the next two years the efficiency of decisions made by bank owners will influence strategic competitiveness and stability of the Russian banking sector.

– Do you think that this year the major issue for banks will be loans to big companies in contrast with non-performing retail loans last year?

– As for the banking sector financial stability, in 2016 the primary issue surely is the assets quality. However, I would not differentiate the amount of risk dependent on the size of a company. In other words, we see that in the next 12-18 months certain industries will show worse performance than others. In accordance with ACRA estimates these will include nonfood retail, construction and automotive industry.

Indeed, the bank’s major risk event can lead to a loss of its financial sustainability. But this will be a risk-management weaknesses of certain players rather than a banking system trend.

As for retail, portfolio depreciation dynamics is not so dramatic there. This is due to the fact that the market became saturated with unsecured retail loans. But if fundamental macroeconomic indicators of households worsen (e.g. real disposable income reduces and unemployment continues its steady, though slow, growth) this can set off a new wave of individual loan defaults.

– What is your estimate of 2016 profit for the banking sector?

– According to ACRA estimates if there are no more macroeconomic shocks and the interest rate remains on the same level, the sector financial result will most probably exceed its 2015 level. We are talking about RUB 300-400 bln profit.

– How many banks may need additional loan loss provisions in 2016?

– We expect that at the end of 2016 the risk value will be within 3.5–4%. That means that pure cost of additional provisions will total RUB 2.1–2.4 trillion.

–What is the use of the Russian Central Bank’s right for reasoned decision?

– This question is close to my sphere, as I am a rating analyst. The point is that rating analysis is based mainly on the information which the agency obtains from the customer or other public sources. Quite often the agency does not agree with the estimates of certain assets or liabilities of a bank and can prove this to investors (rating users). Partly this is why ratings are worthwhile. Most of the market participants can handle publicly available reporting and calculate a couple of ratios by themselves. But penetrating into the essence of transactions and assessing their impact on the bank financial standing is a challenging task that only professional credit analysts can cope with. Such specialists constitute the core of ACRA analytical team.

Moreover, this expert opinion can be obtained only on the basis of a team decision. In credit agencies such team decision-making body is a rating committee.

Therefore, it seems sensible to vest the Bank of Russia with the right for reasoned decision, which will be made by an authorized collegial body.

– Will the banking sector consolidation continue in the coming years? Will the Central Bank keep acting as its main accelerator by revoking licenses?

– Consolidation should continue only for economic reasons. I believe, the Central Bank’s objectives are the banking sector recovery and banking malpractice prevention. It is the bank owners who are expected to accelerate consolidation.

– What do you think on the widely discussed bank resolution tool that is bail-in? Will it be effective? Should it include individuals?

– According to ACRA the idea that major creditors should take part in resolution of the failing bank is right. The main principle applied here is that a living banking business is better than a bankrupt one. In other words, if the bank does not violate any laws and strip out the assets, but is facing failure due to a stressful situation caused by breach of statutory ratios or non-payment, it is generally more beneficial for the financial system as well as for the creditors to rescue it, so that it could remain a going concern. Especially when according to our estimates the average default recovery rates for third-ranked claims in Russia are 5-10% .

Like many other tools, the bail-in efficiency depends on specific details and on timely measures taken by the CBR and the DIA. If the bail-in initiative is approved by the authorized bodies and the draft is put out for public consultation, ACRA will surely make its own evaluation and share it with the investors’ community. This is equally important for credit rating users, as the statutory bail-in tool may significantly influence the principles governing credit rating procedure for banks and their debt instruments.

– Do you think that the existing list of systemically important financial institutions is comprehensive or should it be broadened? If the list should be expanded, what types of banks are to be included in the first place?

– The Central Bank’s approach to criteria and list of systemically important banks is implemented in accordance with the spirit and requirements of the Basel Committee on Banking Supervision to locally important financial institutions. From the regulatory point of view this approach seems best possible. However ACRA’s approach to the banks’ systemic importance in terms of credit ratings will be different, it will take into account special features and structure of the Russian banking industry, as well as regional economies.

This is because ACRA will assign credit ratings according to the Russian national scale, which provides for more detailed breakdown.

– What are the characteristics of ACRA methodological approach to the banks credit ratings assessment?

– Firstly I would like to thank market participants for their feedbacks on the draft methodology that was published on our website for discussion within the investors community. These feedbacks helped us to update our methodology and take into account additional factors specific for the Russian market and regulation.

Fundamentals of our approach are based on combination of qualitative and quantitative assessment of the banks’ major risk areas for banks, deep analysis of their business-models. I would like to point out that our research not only focuses on the current credit standing of a financial institution but covers the future periods of 12-18 months, which complies with ACRA definition of credit rating.

I don’t think that we have reinvented an ‘analytical wheel’ or ‘analytical crystal ball’ here. I believe that ACRA offers the market participants an impartial and independent assessment of the Russian banks’ creditworthiness. This opinion is based on our thorough methodological basis, its compliance with statutory requirements along with highly professional analyst team.

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Natalia Porokhova
Senior Director, Head of Sovereign Ratings and Forecasting Group
+7 (495) 139 04 90
Maria Mukhina
Operating Director
+7 (495) 139 04 80, ext. 107
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